Russia is by far the largest country in Emerging Europe. Its economy has become increasingly dependent on hydrocarbons exports in recent years, leaving it vulnerable to shocks in the global economy. After a decade of political stability and economic prosperity in the 2000s, Russia is entering a more turbulent period that could distract policymakers from tackling the country's immense structural challenges.

At BMI, we ensure our clients make sound business decisions in Russia, using our risk-assessed total analysis model. Our research teams keep our clients informed of the latest market moves and political developments as part of our 'top-down' and 'bottom-up' perspective. Our expert views are supported by our interactive data and forecasting. We also provide in-depth analysis on 24 of Russia’s most important industries. Our analysts will make sure you, as our client, are always ahead of the curve in Russia.

Country Risk

Russia Country Risk

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Core Views

President Vladimir Putin&#39;s popularity remains near record highs. We expect this to suffer moderate declines as the reality of economic hardship beings to be realised by the general public. Political influence will remain in favour of defence and security hardliners. This will have fiscal consequences as military spending continues to remain high.

Prolonged lower oil prices during 2015 will have a negative impact on economic activity. High inflation will negatively affect consumer&#39;s purchasing power resulting in a reduction in private consumption.

This reduction in private consumption is reflected in our balance of payments forecast. Though we expect exports to decrease, due to a significant fall in imports we expect to see a current account expansion during 2015.

Russia Operational Risk Coverage (9)

Russia Operational Risk

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BMI View: Investors will benefit fromRussia&#39;slarge and highly educated workforce, the result of high enrolment rates at the primary, secondary, and tertiary levels.Additionally, Russia is proceeding with trade integration, having acceded to the WTO in 2012. A well-developed banking sector facilitates economic activity, and astrongrail infrastructure provides logistical links throughout the country and across all major borders. Major challenges remain, however, including a high incidence of corruption and bureaucratic delays that poseobstaclesto businessactivity, especiallyforthose relying on export and import of goods. Additionally, we see a...

Russia Crime & Security

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BMI View: Foreign workers and businesses are exposed to a high degree of security risks in Russia. Although criminal activity does not pose a major concern for business operations, a significant threat to foreign workers and business assets emanates from terrorist activity. Russia has been the subject of relatively frequent and large-scale terrorist attacks since the mid-1990s, due to the ongoing Islamist insurgency in the North Caucasus region. Investors also face a high degree of uncertainty at present due to the consequences of Moscow&#39;s actions in Ukraine, which have resulted in the US and the EU imposing economic sanctions, and heightened tensions between Russia and the West. The country therefore receives a low score of 37.2out of 100 in the overall BMI Crime and...

Russia Labour Market

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BMI View: Russia&#39;svery large and highly skilled urban labour force is a significant incentive for investors from a range of different sectors. The country&#39;sgoodeducational standards andstrongenrolment rates from pre-primary through to tertiary level ensure that investors can expect a high level of literacy and numeracy across the country. That said, health risks are high in Russia, raising the possibility of lengthy absenteeismandincurring significant costs for employers. For these reasons, the country scores63.0out of 100for Labour Market risks, putting it inthird...

Russia Logistics

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BMI View: In the short term, Russia&#39;s logistics sector will pose a range of risks to investors. The country&#39;s economic outlook for 2015 has been dampened by the Ukraine crisis and resulting sanctions, which are restricting foreign investment. This will potentially delay vital infrastructure projects which are needed to update ageing utilities and transport networks. Over the medium term, the picture for Russia&#39;s logistics sector is more sanguine, asitsvast natural resources and rising consumer class will drive economic growth, and supply chains are set to benefit from extensive transport links, both internally and with the wider world. However, we highlight that large-scale investment will be necessary to cope with rising trade volumes and alleviate congestion. Russia scores above the regional average in the BMI ...

Russia Trade & Investment

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BMI View: Asone of theworld&#39;smajor emerging markets, investment opportunities in Russia arepotentiallylucrative, butwe caution thatthe trade and investment climate remains fraught with risk.The government continues to impose restrictions on trade flows and limits on foreign direct investment (FDI) in certain sectors, while state-owned institutions are prevalent in all areas of the economy. Corruption is also rampant and the judiciary is weak and subject to political interference, which undermines trust in the legal system.Furthermore, the overall tax burden is considerable and some bureaucratic procedures remain plagued...

Russia Industry Coverage (24)

Agribusiness

Russia Agribusiness

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We have considerably downgraded our outlook for medium-term growth across the general Russian agricultural sector. A currency crisis leading to a severe deterioration in the fiscal situation of the Russian government will result in lower subsidies to the developing dairy and livestock industries. As such, we have revised down our outlook for both out to 2018/19. That said, the country's ban on agricultural imports from certain countries will provide a boon to production over the coming year, as domestic producers take advantage of the lack of competitive imports. We believe that grains production will post positive growth over the coming years, though will decline in 2015/16 owing to poor weather over the planting season.

On August 7 2014, Russia introduced a one-year ban on imports of certain agricultural products from select countries. We outline the major implications of the trade sanctions below:

Autos

Russia Autos

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BMI View: BMI has become even more negative on the near-term outlook for the Russian autos sector over the past quarter. Aworsening mix of falling consumer confidence, currency fluctuations, growing unemployment and falling fixed investment will increase uncertainty in the economy over 2015.We are now targeting a 21.8% fall in sales and an 11.1%% fall in production in 2015.

In 2014, sales of light vehicles fell by 10.3%, to 2,491,404, according to figures from the Association of European Businesses (AEB). The sales slump came as Russia&#39;s economy slipped into recession caused by a variety of factors, including international financial sanctions imposed on the country in response to the Ukraine crisis, resulting currency weakness, a slump in the global price of oil over H214, as well as sluggish fixed investment and private consumption...

Russia Commercial Banking

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Consumer Electronics

Russia Consumer Electronics

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BMI View: There are positive fundamentals for medium to long term growth in consumer electronics spending in Russia, such as relatively low device penetration rates and rising incomes. However this growth story has faced a major disruption following the imposition of sanctions against Russia in mid-2014that have resulted in economic crisis and sharp depreciation of the rouble against the US dollar.This will hit Russian consumers' purchasing power, as well as leading to some vendors cutting supply of devices due to uncertainty, and as a resultwe have revised our outlook for consumer electronics spending growthdownwards.We now expect spending to decrease at a compound annual...

Defence & Security

Russia Defence & Security

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BMI View: Despite the dissolution of the Soviet Union and the Warsaw Pact over two decades ago, Russia remains an important international actor both in the Eurasian region and in the world at large. The country retains some of the world's biggest armed forces and has its largest nuclear arsenal.

Russia has exploited rising hydrocarbon prices to perform a long-overdue modernisation of its armed forces. That said, the ability of Russia to continue on its path of military modernisation was cast into doubt in early October 2014 when Putin's finance minister Anton Siluanov cast doubt on whether the country's finances could afford to honour the modernisation pledges made to the country's military. This is not the first occasion that there have been disagreements in Putin's cabinet over military spending levels, with Alexei Kudrin, Siluanov's predecessor resigning in 2011...

Food & Drink

Russia Food & Drink

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BMI View: Russian consumers will continue to stockpile food until there is a consensus that the inflationary spiral has peaked. The surge in prices andtheban on food imports from the West provide a key opportunity for Russian manufacturers to grow market share, particularly in value areas such as canned foods.

Freight Transport

Russia Freight Transport

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Following a year in which BMI saw mixed growth dynamics across Russia's freight transport sector, with volumes either declining or growth slowing in most of the freight modes, 2015 will signal a further slowdown as the country's economy is expected to contract and the main driver of growth over the past decade - household consumption - continues to weaken.

Total trade is estimated to have decreased by 0.75% in real terms in 2014. It is projected to pick up, with our Country Risk desk forecasting a y-o-y increase of 3.0% in 2015.

Rail freight is to continue to dominate the sector in terms of turnover, which is projected to decline by 4% in 2015. We are seeing a consolidation of players in this freight transport mode, with major mining and steel producing firms selling their transport subsidiaries and major private logistics players developing in Russia's rail freight system.

Information Technology

Russia Information Technology

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BMI View: Ouroutlook for Russian IT market spending growthturned bearish in response to the impositionof sanctionsin 2014, which resulted in rouble depreciation and undermined domestic confidence levels.We expect growth to be maintained in local currency terms overthemedium term, but the US dollar growth outlook is much weaker.Meanwhile, another area where political factors are contributing to uncertainty is regulation of the internet, which could also result in the industry losing its lustre. Our short-term outlook is weaker following our macroeconomic and IT forecast downgrades, however our core view is for an easing of tensions over the medium term, which will allow the...

Infrastructure

Russia Infrastructure

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BMI View: Weforecast a contraction of 5.4% real growth in Russia&#39;s construction industry in 2015 on the back of international sanctions and falling oil prices. Private investment - which is critical for infrastructure development in Russia - has declined severely as the Russian economy weakens in line with the country&#39;s business environment.

Key Trend And Developments

Developments have prompted our Country Risk team to revise down our GDP growth forecasts for Russia from 0.5% real growth to a 5.6% contraction in 2015. Russia&#39;s annexation of Crimea and perceived belligerence towards Ukraine, in addition to falling oil prices, have triggered significant rouble volatility and massive private net capital outflows. The flight of capital, which could have otherwise been deployed to productive...

Insurance

Russia Insurance

Medical Devices

Russia Medical Devices

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BMI Industry View: TheRussianmedical device market is expected tocontractby a CAGR of2.9% over the 2013-2018 period,due to the weakening of the rouble. Russia was one of the fastest growing markets in the region for many years, but thefinancialsanctions imposed by the West due to Russia's involvement in theUkraine crisisas well as falling oil prices are expected to cause a deep recession in 2015,which will adversely affect medical devicemarketgrowth, as less...

Metals

Russia Metals

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BMI V iew: The Russian metalssectorwill post weak growth over the remainderof 2014 as thealuminium sectorreturns to modest growth after extensive cutsand weak prices plague the steel sector.Beyond 2015,growth will pick up as we see higher prices for aluminium and global demand growth for steel improves. Still, we expectcompanies' investment plans to focuson improving plant efficiency and reducing costs rather than building new plants or expanding production capacity. Despiteonly modestgrowth, Russia will remain one of the world's largest producers of base...

Mining

Russia Mining

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BMI View: Russia&#39;s mineral production growth will remain solid over the coming years.Coal and goldproductionwilloutperform PGM&#39;s and iron ore output growth. However, the sector&#39;s growth will be hindered by weak global mineral prices and Western sanctions. Furthermore, the country&#39;s restrictive regulatory environment will deter foreign investment from entering the sector.

We believe Russia&#39;s mining sector will experience solid, but not rapid growth over the coming years. Russia has significant growth potential due to its rich mineral deposits, including coal, iron ore, gold and platinum. Additionally, a number of new projects are set to come online, such as PolyusGold&#39;s Natalka...

Oil & Gas

Russia Oil & Gas

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BMI View: Russia reached record post-Soviet production of oil and gas condensate in 2014, but is expected to see output fall over the coming five years due to the impact of sanctions.The countryis increasingly focusing investment onprojectsto support its diversification of exports away from Europe to China.Downstream output remains strong with upgrades improving efficiencies at Russia's major refineries.

Petrochemicals

Russia Petrochemicals

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BMI View: The outlook for the Russian petrochemicals industry continues to worsen as sanctions and low oil prices continue to bite into local demand.We warnthat the situation could damage the country&#39;s ambitious long-term production targets, whichaim atthe country becoming a major international supplier of basic polymers.

Sibur&#39;s recent warning of negative growth in coming quarters supports BMI&#39;s view that the industry will suffer from the effects of falling demand from the automotive and construction sectors. BMI forecasts a severe recession in 2015, with GDP dropping 5.6% from 0.5% growth in 2014. As long as sanctions are in force, they will have a corrosive effect on Russia&#39;s business...

Pharmaceuticals & Healthcare

Russia Pharmaceuticals & Healthcare

Power

Russia Power

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BMI View : There is little to like about the Russian utilities market and weak electricity demand, a severe economic contraction and tightening credit conditions will weigh on domestic and foreign power companies over 2015. Ratings downgrades and aggressive monetary tightening will heighten financing costs for domestic players, while foreign companies will repatriate profits rather than invest capital.

The outlook for domestic and foreign utilities operating in the Russian power market is bleak and the operating environment will become increasingly challenging over 2015. Our Country Risk team expect Russian real GDP to contract by 5.6% in 2015 as a consequence of credit market tightness and elevated inflation - a result of the sharp Russian rouble sell-off at the end of December 2014. This will present significant challenges for domestic utilities such as...

Real Estate

Russia Real Estate

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BMI View: The considerable long-term potential of Russia commercial real estate sector is being undermined by the current economic and geopolitical headwinds facing the country. Falling foreign investment combined with an increasingly cautious private sector are leading rental costs to stagnate across the market, with limited supply providing an important buffer againsta contraction in rates.

A slowing economy and export market are among the major challenges facing Russia's commercial real estate sector as we move into 2015. Over recent years, the market has enjoyed a sustained period of growth, driven by rising income levels and private spending and increased foreign demand an investment. Rental rates, particularly those in the retail and industrial segments, have risen to match those of...

Renewables

Russia Renewables

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BMI View: We have lowered our forecasts for the Russian renewables industry this quarter,due to the impact of the steep losses suffered by the Russian rouble linked to plunging oil prices and US sanctions.Despite a wealth of potential, the prospects for the industry remain muted owing to the inhibitive regulatory environment for renewable energy and the lack of investor interest in the market.We maintain that Russian energy policy is orientedeastwards toward China in the wake of deteriorating relations with Europe. This will feed through into the renewables sector, where we have already seen projects mooted that would deliver export electricity flows to the Chinese market - with backing from Chinese investors.

Retail

Russia Retail

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BMI View: The Russian retail sector and the overall economy are struggling to face the Western sanctions, decline of national currency and low oil prices. As the country's leaders refuse to compromise with the demands of the United States and the European Union with regards to the aggression in Ukraine, consumers in Russia are suffering from inflation, the drop of rouble and the overall economic isolation. We forecast that 2015 will be an exceptionally difficult year for the retailers operating in Europe's largest economy.

Three key developments are posing significant risks for the Russian retail sector: decline of oil prices, weakening rouble and Western sanctions. Crude oil price slumped by more than 50% since January 2014 beating the gloomiest forecasts and currently there are no signs of...

Shipping

Russia Shipping

Telecommunications

Russia Telecommunications

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BMI View: The key theme for Russian mobile marketshas beenthat ofconsolidation. Although the merger of Tele2 and Rostelecom has been finalised, BMI believes that there is further consolidation and rationalisation in the pipeline as mobile operators try to stay competitive in an already highly saturated market. Althoughmarket saturation reached 166% in Q214, BMI believes that there is still some scope for growth as some of these subscribers will be discounted as inactive SIM-cards get deactivated. Expanding LTE services offer opportunities for more value-add data products to add revenue, while rural areas could provide customer base growth.

Tourism

Russia Tourism

Water

Russia Water

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The Russian water sector is going through a somewhat turbulent time, due mainly to the political unrest within the country. The government has had to place its focus on other areas such as the crisis with Ukraine and the unstable environment has meant investment from external sources has also dropped. However, growth is still forecast over the long term and once the country is more settled, the government will continue its development of all parts of the sector. The main area of interest is likely to be the market for water equipment and technology as Russia looks to enlarge the range of its water network while reducing the amount of wastage.

In 2011 Russia launched its Clean Water Programme. This scheme, set to run until 2017, aims to significantly improve drinking water quality in the country. This has become a major problem for Russian citizens after years of government neglect to the water sector lead to barely drinkable water. It has...

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